commuting options

tiposx

I am lucky enough to be retiring shortly at the age of 55 on a final salary pension scheme which will give me half of my current pay. In addition I will be working part-time. My outgoings are very low, I have no debts and I could live comfortably on the pension after commuting to a bigger lump sum.I have the option of commuting on a 12 to1ratio up to £53k on top of the existing lump sum. If I don't commute I will be paying income tax at the higher rate. Would I be better with the full pension, or the bigger lump sum, or perhaps commuting enough to gring my total income below the 40% income tax band?

markr007

You probably need to work the figures through in some detail on this one as even if you are in the 40% bracket now, you may not be in the future depending on how the tax bracket increases versus your pension.

The one obvious comment though is that 12 to 1 at 55 is pretty penal rates. Allowing for 40% tax though and it looks much more reasonable. On balance I think you probably are better commuting to the tax band but you really should consider asking an IFA to look at this in detail as it is not obvious.

Also depends on your health, plans for the cash etc etc.

tiposx

Thanks Markr. All the advice I have had so far seems to say the same - If only I knew how long I was going to live for...:rotfl:

taliesin

My situation has many elements in common with yours, tiposx. At 55 in average health or better you have at least 25 years to look forward to, so, as Markr says, the commutation rate of 12:1 is pretty poor. What I plan to do is to pay a fraction of my salary (the part on which I would otherwise pay 40% higher rate tax) back into my employer's pension scheme. This will uplift my pension after final retirement, and I will have to pay only basic rate tax on it.

If you look into this option, there are some obvious things to consider - how long until final retirement, expected final (full-time equivalent) salary &c. One that may not be obvious is the impact of the increased income tax allowance for those over 65, and the rather aggressive way in which it is withdrawn if your income exceeds a threshold (currently £22,900). If increasing your total taxable income will take you into the bracket across which the allowance is withdrawn, this course of action may not be worthwhile. Do take that into account in your calculations (although of course the tax regime may change over the next ten years).

Good luck - and enjoy the part-time working!